Sound investment decisions are all based on planning, and this is a critical first step when you are just starting out on your personal investment journey.
Perhaps you are hoping to invest and create enough wealth for your retirement, or maybe you’re trying to save some money to treat yourself to a holiday home – whatever your intentions, you need a plan now.
Once you know how much money your desired outcome requires, you can begin to understand how much you need to invest now and adopt an appropriate risk strategy.
As a simple example, let’s say you need to create a retirement income of £10,000 a year to go on top of your state pension. If your pension pot is £200,000, you might find an investment vehicle that grows your pot at 5% a year, allowing you to cream off that growth annually for your £10,000 income.
In this case, your plan will focus on creating that initial pot of £200,000. It sounds a lot, but the sooner you can begin, the more chance you can make it.
Now that you know how much money you need to achieve your goals, you must work through a plan of how to get there.
Different Investments You Can Make
Many people will use the services of a financial adviser to help build their investment plan and, in many cases, carry it out on their behalf. But it is possible to work through the options yourself – your advisor will cover similar ground.
The first thing you must understand is the types of investment you can make to grow your wealth. Here are some of the key options:
Shares
Buying shares can have two positives – the price can rise over time, and you should also receive a dividend income. If you are in it for the long term, seek the best shares to buy now UK, and reinvest any dividends into buying more of the same share. If you go for good FTSE 100 companies with a record of good dividends, your investments will grow nicely over time. As you go along, spread your share investments across a portfolio of different companies to spread the risk since the value of your holdings could go down.
Private pension
Investing in a private pension is a tax-efficient way to plan for your retirement. You cannot access the cash until you are 55, so it’s a way of locking in your regular investments. The fund should rise nicely each year, and you will get at least yearly updates about its performance, with projections about how much your fund will be worth and how much income that might equate to on your chosen retirement date.
Investment funds
There are plenty of investment funds available with audited track records that should give you a solid idea of how much your fund will be worth when you retire. Good investment funds spread their spend over multiple markets, minimising risk, and can have excellent returns. You can choose to pay in a set amount each month to top up your fund, which will then benefit from compound growth over time. When you reach your desired target date, you can stop paying into your fund and instead draw out annual “profits” as income. This is where it’s easiest to understand how a fund of £200,000 would give you £10,000 income a year based on annual growth of 5%.
Property
Statistically, property is an excellent long-term investment. You could think about purchasing a rental with a buy-to-let mortgage, assuming you have the necessary deposit (usually at least 25% of the mortgage). Don’t count on making real income in the short term – your rental received will be higher than your mortgage payments, but you will need to pay income tax on the entire rent. The money you make here is in the long-term house price increase. But be aware you will need to pay capital gains tax when you do come to sell. If you have a repayment buy-to-let, your tenant also pays off a slice of your mortgage each month, so your equity increases over time. If you start your property investment early enough, it could be the mortgage is paid off by the time you come to retire, so all the rent is yours to take as an income.
ISAs
The option of leaving your cash in a bank savings account no longer counts because interest rates are chronically low. However, you do have an annual ISA allowance of £20,000 a year. ISAs attract better interest than banks, and you do not need to pay income tax on interest received or capital gains. There are four types of ISA to choose from – or you can split your investments across two or more of them:
- Cash ISA
- Stocks and shares ISA
- Innovative finance ISA
- Lifetime ISA
Find a Balance that Works for You
If you are not using a financial advisor, the best advice is to balance your investments across several of the options we describe in this guide. In that way, if one method does not work as well as you might have hoped, another might outperform expectations.
As time goes on, you should continuously evaluate performance to check you are on track to achieve your goals and adjust your investment strategy accordingly.
And finally, as you get closer to your target date, which will probably be when you intend to retire, change your strategy to be geared towards less risk because you don’t want to lose a large chunk of your pot at the last minute. That means adopting a lower risk investment fund, switching ISAs to cash ISAs, and thinking about selling your property and investing the proceeds into a low-risk fund from which you can draw down cash.
Remember, it pays to seek financial advice, particularly in the planning stage, as everyone’s circumstances are different.
